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Energy Trading {Unit 04}

Energy Trading {Unit 04}

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Published by rathneshkumar
matter of energy trading
matter of energy trading

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Published by: rathneshkumar on Feb 19, 2009
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09/01/2012

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Unit-4
Technical Analysis: Introduction
The methods used to analyze securities and make investment decisions fall into twovery broad categories: fundamental analysis and technical analysis. Fundamentalanalysis involves analyzing the characteristics of a company in order to estimate itsvalue. Technical analysis takes a completely different approach; it doesn't care one bitabout the "value" of a company or a commodity. Technicians (sometimes calledchartists) are only interested in the price movements in the market.Despite all the fancy and exotic tools it employs, technical analysis really just studiessupply and demand in a market in an attempt to determine what direction, or trend, willcontinue in the future. In other words, technical analysis attempts to understand theemotions in the market by studying the market itself, as opposed to its components. Ifyou understand the benefits and limitations of technical analysis, it can give you a newset of tools or skills that will enable you to be a better trader or investor.
What Is Technical Analysis?
 Technical analysis is a method of evaluating securities by analyzing the statisticsgenerated by market activity, such as past prices and volume. Technical analysts do notattempt to measure a security's intrinsic value, but instead use charts and other tools toidentify patterns that can suggest future activity.
Just
as there are many investment styles on the fundamental side, There are also manydifferent types of technical traders. Some rely on chart patterns, others use technical indicatorsand oscillators, and most use some combination of the two. In any case, technical analysts'exclusive use of historical price and volume data is what separates them from their fundamentalcounterparts. Unlike fundamental analysts, technical analysts don't care whether a stock isundervalued - the only thing that matters is a security's past trading data and what informationthis data can provide about where the security might move in the future.
 
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The field of technical analysis is based on three assumptions:1. The market discounts everything.2. Price moves in trends.3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoringthe fundamental factors of the company. However, technical analysis assumes that, atany given time, a stock's price reflects everything that has or could affect the company -including fundamental factors. Technical analysts believe that the company'sfundamentals, along with broader economic factors and market psychology, are allpriced into the stock, removing the need to actually consider these factors separately.This only leaves the analysis of price movement, which technical theory views as aproduct of the supply and demand for a particular stock in the market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means thatafter a trend has been established, the future price movement is more likely to be in thesame direction as the trend than to be against it. Most technical trading strategies arebased on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainlyin terms of price movement. The repetitive nature of price movements is attributed tomarket psychology; in other words, market participants tend to provide a consistentreaction to similar market stimuli over time. Technical analysis uses chart patterns toanalyze market movements and understand trends. Although many of these chartshave been used for more than 100 years, they are still believed to be relevant becausethey illustrate patterns in price movements that often repeat themselves.
 
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Not Just for Stocks
 Technical analysis can be used on any security with historical trading data. Thisincludes stocks, futures and commodities, fixed-income securities, forex, etc. In thistutorial, we'll usually analyze stocks in our examples, but keep in mind that theseconcepts can be applied to any type of security. In fact, technical analysis is morefrequently associated with commodities and forex, where the participants arepredominantly traders.Now that you understand the philosophy behind technical analysis, we'll get intoexplaining how it really works. One of the best ways to understand what technicalanalysis is (and is not) is to compare it to fundamental analysis. We'll do this in the nextsection.
Technical Analysis: Fundamental Vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of thought in thefinancial markets. As mentioned, technical analysis looks at the price movement of asecurity and uses this data to predict its future price movements. Fundamental analysis,on the other hand, looks at economic factors, known as fundamentals. Let's get into thedetails of how these two approaches differ, the criticisms against technical analysis andhow technical and fundamental analysis can be used together to analyze securities.
The Differences
Charts vs. Financial Statements 
At the most basic level, a technical analyst approaches a security from the charts, whilea fundamental analyst starts with the financial statements By looking at the balancesheet, cash flow statement and income statement, a fundamental analyst tries todetermine a company's value. In financial terms, an analyst attempts to measure acompany's intrinsic value. In this approach, investment decisions are fairly easy to make- if the price of a stock trades below its intrinsic value, it's a good investment. Althoughthis is an oversimplification (fundamental analysis goes beyond just the financialstatements) for the purposes of this tutorial, this simple tenet holds true.

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